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Avanti made good progress in the second six months of the current extended financial period. In addition, HYLAS 4 became commercially operational this month and there have been significant contract awards since launch, encouraging the belief that it should improve the financial outlook. The last reporting period reflected some uncertainty around the financial restructuring; however, this has been completed successfully. Avanti also received $20m cash from the Indonesian arbitration settlement in August. We await guidance for FY19 trading, including possible modest financing needs, before restoring forecasts.
Avanti Communications Group
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The successful restructuring and launch of Hylas-4 has radically transformed Avanti. A new CEO is on-board and debt servicing is on a manageable footing. A new strategy will shortly be in place and early benefits are visible in the recent contract win with Viasat. We withdraw our forecasts until we have greater clarity on this strategy but continue to see a time soon when Avanti fully recovers its interest charge.
Avanti had a busy Q3 ahead of its April conversion to equity of its 2023 notes. Following the $20.1m settlement due from the government of Indonesia at the end of July, it expects to complete further lines of funding to complement the restructuring. Meanwhile, the successful launch of HYLAS 4 just after the Q3 end maintains the schedule to bring the satellite into operational service towards the end of July 2018, thus significantly increasing the capacity of the fleet. The removal of financial constraint should support the company as it refines and implements its new strategy.
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The proposed restructuring of Avanti’s capital structure through a debt for equity swap will leave the company on a much firmer financial footing. Annual interest payments are expected to fall by over 70% and the bondholders have taken a major haircut. A more sustainable balance sheet should help improve Avanti’s ability to win new business going forward.
The company has announced a proposed financial restructuring that should clear the way to resume more normal operations. FY17 results are still to be released, and are expected in January 2018. Until we have a more current financial base to work from, we are withdrawing our forecasts. That is not to say that existing shareholders may not finally benefit from the restructuring. In our opinion, greater risk lies with the proposals not proceeding. The debt for equity swap, interest savings and discount being assumed by the bondholders should provide a solid foundation for Avanti to execute its strategy, with an improved prospect for equity holders.
The company has announced a further positive financing development with the securing of $100m of Super Senior Debt with a coupon of 7.5% that provides a significant reduction in interest payable on around 10% of outstanding gross debt. The recent trading updates are less positive and we have reduced our expectations accordingly. In addition, we still await a launch date for HYLAS 4 which is a crucial factor in attaining the required revenue and cash flow development. The fair value for the equity falls to 93p from 109p previously with our longer-term assumptions unaltered.
Following its successful refinancing in January, Avanti is gathering momentum once again. It has today announced a very significant partnership for sub-Saharan Africa connectivity with Millicom, a top three player in the African telecom market. Avanti is not only to provide 4G backhaul services via its satellite network to improve access in remote and rural areas, but is also to build a new Gateway Earth Station in Senegal to enhance performance across the region. The site is to be co-located with Millicom operations and will service existing HYLAS 2 coverage as well as those from HYLAS 4. We await confirmation of a launch date in H217 for the new satellite, but today’s announcement appears to confirm Avanti’s Ka-band technology remains at the forefront of satellite connectivity.
The successful refinancing fully funds the development of HYLAS-4. The forthcoming launch will more than double Avanti's existing satellite capacity and its full utilisation should generate a revenue base capable of fully recovering the group’s cost base. A more pragmatic policy on pricing has been established and this should accelerate full utilisation.
Following the success of the consent solicitation announced on 6 January, Avanti’s refinancing is now complete. The company can pursue the strategic development of its satellite network, increasing revenue and cash flow potential. While lower guidance and the refinancing dilute previous cash equity valuations, a significant opportunity for shareholder value creation remains. Our reinstated and revised forecasts produce a current DCF-based fair value standing at 109p per share.
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Avanti has today announced a refinancing of its operations with the existing bondholders providing an additional $130m of new funds on completion, with a further $112m of liquidity provided by potential interest payment deferrals up to April 2018. The company can now proceed to more than double its available Ka-band capacity by launching the HYLAS 4 satellite later this year. The focus will be on filling the capacity at planned pricing, particularly to sub Saharan Africa. Revised guidance of 35% top line growth implies a longer journey for equity holders, but that can at least continue. When 2016 accounts are available, we will reinstate our revised forecasts and a view of the equity potential.
SES has announced its intention to buy the outstanding 49.5% minority in O3b, the medium earth orbit (MEO) Ka-band high throughput satellite (HTS) constellation. SES is paying $2.6bn in EV (including $1.2bn of 9.5% coupon debt) and is to complete the outstanding $600m capex programme to deploy the fleet. The purchase represents an EV/sales multiple of 26x expected FY16 revenues. The valuation has interesting read across to Avanti as it reflects the value the industry is placing on the newer HTS players. The FY16e Avanti EV/sales multiple is just 6x. Our view remains that as the market recognises the ability of Avanti to execute its plan to reach a highly cash generative phase from mid-2018, this value gap should close. That implies substantial upside for Avanti shares.
Avanti has reported Q3 trading that not only allows it to maintain its guidance for revenue growth, delivering a positive EBITDA in Q3, but clearly indicates a path towards free cash generation. With contract momentum building with high quality customers, recurring revenues are growing, satellite capex is almost complete and the financing facilities nearing finalisation appear more than sufficient to execute the plan. As this progress becomes more widely appreciated, we expect the share price to be released from its shackles and start to trend towards cash-based fair values. Our own capped DCF still returns a fair value of 427p per share.
Avanti has announced a major new cellular backhaul contract with EE in the UK, demonstrating continued growth in this important segment of demand. The upcoming Q3 trading statement will provide an opportunity for Avanti to update and reassure the market that it remains on track to deliver on its plans. As this becomes increasingly evident, we would expect the shares to progressively reflect the potential of the cash-flow based valuations, which suggest substantial current undervaluation, with further upside potential as risk retires over time.
In our view Avanti’s recent positive news significantly outweighs the neutral in terms of equity value. Avanti has announced a new contract for the provision of services to İşNet in Turkey. Meanwhile, S&P placed the bond issue on CreditWatch Negative, which has no meaningful impact on the financials, nor would it if S&P joins Moody’s on a lower rating. As Avanti builds its sales and cash flows, the rating announcement should prove irrelevant. We maintain our view that the potential equity value is 427p, with upside as risk is retired.
Avanti Communications is a play on the growing demand for highthroughput data transmission for broadband in EMEA, using its Ka-band satellite network. With capacity already successfully deployed, the company is in a revenue build phase having financed two new satellites. If H216 recurring revenue guidance is achieved, it augurs well for future cash delivery and therefore the value of the currently debt-encumbered equity.
AVN Financing, BLU Timeline and Results, ECK Contract Wins, FITB Placing, Subscription and Convertible Loan Note, HRN Admission to AIM, MARL Estimate, MMH Interim Results, MXO Mexico Update, NET Contract Win, PLI Q2 Results and Highlights, SVR Contract Win, TRCS Trading Update, UNG Launch, VENN Trading Update
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